Health care now a great area for investments

Perhaps more than any other sector of our economy, health care is undergoing rapid and significant change, which creates opportunity for business owners and health care investors.

There’s a constant stream of information regarding new regulations, trends and changing demographics, and savvy investors are watching for opportunities. The four biggest trends in health care are:

• The expansion of health insurance coverage driven by the Affordable Care Act.

• Our aging population.

• Increasing adoption of information technology.

• The continued search for cost reduction and efficiencies.

As a result, investors are keenly interested in health care IT, outsourced hospital services, staffing and specialty managed care services. Businesses that operate in these niches are in demand and selling for historically high valuations.

Here’s a discussion of these trends and their impact on mergers-and-acquisitions activity.

• U.S. Supreme Court upholds Affordable Care Act (ACA or “Obamacare”): Following months of debate, study and speculation, the Supreme Court in June 2012 upheld a key provision of ACA, the individual mandate that requires U.S. residents to have health care insurance by 2014 or pay a penalty. It further deemed constitutional an expansion of the Medicaid program to provide coverage to more of the uninsured.

M&A impact: Intended to provide more health care benefits to more people while lowering costs, ACA has delivered clear guidance about which businesses will thrive in the near future. Health care providers, pharmaceutical and medical device manufacturers, and numerous technologies that aid in efficient patient management or cost-savings will benefit.

In response, health care M&A activity has burgeoned since the ruling. Before that, many health care providers, manufacturers and investors had postponed capital outlays. The fourth quarter of 2012 was the second-best quarter in health care M&A activity in the last 10 years, and the rise in activity is expected to continue into 2013 as demand for coverage increases and businesses reinvent themselves via acquisition.

• Aging baby boomer population driving overall health care demand: While more young people begin to purchase health insurance, as required by the ACA, the number of adults older than 65 is expected to increase significantly as the baby boomer generation ages. Per-capita health care spending in this age group is three to five times higher than for people under 65.

M&A impact: Long-term care, hospice and pharmaceutical companies will experience escalating demand. Increased need for acute care and skilled nursing facilities is expected to result in consolidation in the managed-care industry, as acquisitions provide immediate access to additional bed capacity with trained staff already in place. Hospitals with excess capital may pursue M&A to increase returns on capital.

• IT adoption, with EMR/EHR leading the pack: Although they’ve been available since the 1970s, significant use of electronic medical records (EMRs) has occurred only within the last 10 years as health care providers deal with the increase in participants and feverishly work to control costs.

EMRs are software solutions and services that improve quality of patient care and the timeliness of reimbursement.

Electronic health records (EHRs) provide the ability to share the EMRs with the patient and providers at other locations. The U.S. government, through the Health Information Technology for Economic and Clinical Health (HITECH) Act, is providing an unprecedented $31 billion in incentives to health care providers that implement EHR systems.

M&A impact: Large corporations are looking to acquire EMR and EHR providers in order to expand their product offerings. Acquisitions of specialty EMR technologies that serve niche markets, including emergency rooms, behavioral health facilities and ePrescribing, also will occur.

• Providers moving towards integrated health care: Health care providers are seeking to increase efficiencies and mitigate risks by establishing continuity of care plans. For example, DaVita’s acquisition of HealthCare Partners transfers DaVita’s company vision from a pure dialysis company to one of integrated care, coordinating the patient’s care from dialysis to hospitalizations with bundled pricing or capitated payment arrangements.

M&A impact: There’s more incentive than ever among large health systems and health insurance companies to integrate vertically, on both local and national levels, in order to better offer coordinated care and reduce the cost of delivery. Mergers and acquisitions will be the tools of choice in building out integrated networks. In addition to acquisition activity, health care providers will continue to build partnerships and joint ventures in order to leverage resources, technology and research.

Interwoven through all these trends are investors ready to deploy their reserves.

Private-equity groups have $350 billion of committed capital ready to invest in businesses. Strategic buyers are flush with cash, an estimated $2 trillion, and are ready to make acquisitions that enhance core operations while streamlining costs and efficiencies.

Businesses specializing in any of the areas that will be affected by the ACA, changing U.S. demographics, health care information technology and improving efficiencies for health care providers may want to take a good look at whether or not they’re ready to consider selling.

After many months of sitting on the sidelines, health care investors and strategic acquirers are back in action.